**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





(MARK
      ONE)


**x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**


**ACT
      OF 1934**





For
      the
      quarterly period ended September 30, 2006





OR





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      transition period from ________ to ________.





Commission
      File No. 000-27277





**VOCALSCAPE
      NETWORKS, INC.**


(Exact
      name of registrant as specified in its charter)


Nevada
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              98-0207554
                (I.R.S.
                  Employer
                Identification
                  No.)





170
      E.
      Post Road, Suite 206


White
      Plains, New York


(Address
      of principal executive offices, zip code)





(914)
      448-7600


(Registrant’s
      telephone number, including area code)





(Former
      name, former address and former fiscal year,


if
      changed since last report)





Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes x
      No o





As
      of
      September 30, 2006 there were 16,692,585 shares of the Registrant’s common
      stock, $0.001 par value per share, outstanding, and 20,000 shares of Series
      A
      Convertible Preferred Stock outstanding. As of November 17, 2006 there were
      57,327,435 shares of the Registrant’s common stock, $0.001 par value per share,
      outstanding, and 35,000 shares of Series A Convertible Preferred Stock
      outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes o No
x





Indicate
      by check mark whether the registrant is a shell company (as defined in Exchange
      Act Rule 12b-2 of the Exchange Act):    Yes o No
x







**VOCALSCAPE
      NETWORKS, INC.**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE PERIOD ENDED SEPTEMBER 30, 2006**





**INDEX**








**Index**
            
            **Page****Part
                I.**
            **Financial
                Information**Item
                1. Financial Statements
            3Consolidated
                Balance Sheet as of September 30, 2006 (unaudited)
            F-2Consolidated
                Statements of Operations - for the three and nine months ended
                September 30, 2006 and 2005(unaudited)
            F-3Consolidated
                Statements of Cash Flows for the nine months ended September 30, 2006
                and 2005 (unaudited)
            F-4Notes
                to Unaudited Consolidated
                Financial Statements
            F-5Item
                2. Management’s Discussion and Analysis of Financial Condition and
                Results of Operations
            4Item
                3. Controls and Procedures
            7**Part
                II.**
            **Other
                Information**
            7Item
                1. Legal Proceedings
            7Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            8Item
                3. Defaults Upon Senior Securities
            8Item
                4. Submission of Matters to a Vote of Security Holders
            8Item
                5. Other Information
            8Item
                6. Exhibits
            9**Signatures****Certifications**





2


CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
      Form
      10-QSB release contains “forward-looking statements.” In some cases, you can
      identify forward-looking statements by terminology such as “may,” “will,”
“should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of such terms
      and other comparable terminology. These forward-looking statements include,
      without limitation, statements about our market opportunity, our strategies,
      competition, expected activities and expenditures as we pursue our business
      plan, and the adequacy of our available cash resources. Although we believe
      that
      the expectations reflected in the forward-looking statements are reasonable,
      we
      cannot guarantee future results, levels of activity, performance or
      achievements. Actual results may differ materially from the predictions
      discussed in these forward-looking statements. The economic environment within
      which we operate could materially affect our actual results. Additional factors
      that could materially affect these forward-looking statements include, among
      other things, the company’s ability to (i) adapt to rules and regulations that
      may be promulgated that affect how Vocalscape must conduct its
      Voice-over-Internet Protocol business and operations; (ii) market and distribute
      its Voice-over-Internet Protocol services; (iii) secure capital to continue
      operations; (iv) achieve and manage growth; and (v) develop or acquire new
      technology to effectively provide new and/or better services. Additional factors
      that will impact the company’s success include the company’s ability to attract
      and retain qualified personnel; the voting decisions of Robert Koch, who
      controls approximately 80% **** of
      the
      voting power of all security holders of Vocalscape; and other factors discussed
      in Vocalscape’s filings with the Securities and Exchange Commission
      (“SEC”).





Our
      management has included projections and estimates in this Form 10-QSB, which
      are
      based primarily on management’s experience in the industry, assessments of our
      results of operations, discussions and negotiations with third parties and
      a
      review of information filed by our competitors with the Securities and Exchange
      Commission or otherwise publicly available. We caution readers not to place
      undue reliance on any such forward-looking statements, which speak only as
      of
      the date made. We disclaim any obligation subsequently to revise any
      forward-looking statements to reflect events or circumstances after the date
      of
      such statements or to reflect the occurrence of anticipated or unanticipated
      events.





**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS.**







3


**Vocalscape
        Networks, Inc. and Subsidiary**
 **Consolidated
        Financial Statements**
 **For
        the Nine Months ended September 30, 2006 and 2005**
 **(Unaudited)**
 
 
 
 **Vocalscape
        Networks, Inc. and Subsidiary**
  Index
        to
        Consolidated Financial Statements
 Page(s)Consolidated
                    Balance Sheet (unaudited)
                2Consolidated
                    Statements of Operations (unaudited)
                3Consolidated
                    Statements of Cash Flows (unaudited)
                4Notes
                    to Consolidated Financial Statements (unaudited)
                5-15
 
  Vocalscape
          Networks, Inc. and Subsidiary
 Consolidated
          Balance Sheet
 September
        30, 2006
 (Unaudited)
 
 **ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              -Prepaid
                  expenses
              
              
              2,500Total
                  current assets
              
              
              2,500Property
                  and equipment, net
              
              
              26,506Other
                  assets
              
              
              5,804Development
                  costs, net
              
              
              3,695Total
                  assets
              
              $
              38,505**LIABILITIES
                  AND STOCKHOLDER'S DEFICIT****Current
                  liabilities:**Bank
                  overdraft
              
              $
              13,594Notes
                  payable
              
              
              1,027,000Notes
                  payable, related parties
              
              
              157,747Loan
                  payable due for software purchase, current portion, net of
                  discount
              
              
              69,781Accounts
                  payable
              
              
              273,708Accounts
                  payable, related parties
              
              
              402,680Accrued
                  expenses
              
              
              1,067,462Convertible
                  debentures
              
              
              84,912Payable
                  to shareholder
              
              
              900,027Other
                  liablilities
              
              
              14,289Total
                  current liabilities
              
              
              4,011,200**Long
                  term liabilities:**Loan
                  payable due for software purchase, net of discount
              
              
              21,877Total
                  liabilities
              
              
              4,033,077Commitments
                  and contingencies (Note 8)**STOCKHOLDERS'
                  DEFICIT**Preferred
                  stock, $0.001 par value, 25,000,000 authorizedSeries
                  A, voting convertible preferred stock, 100,000shares
                  authorized, 20,000 shares issued and outstanding(liquidation
                  value $0.50 per share)
              
              
              20Common
                  stock, $0.001 par value, 100,000,000 authorized,14,959,474
                  issued and outstanding
              
              
              14,959Common
                  stock issuable at par value (38,293,769 shares)
              
              
              38,294Deferred
                  consulting fees
              
              
              (106,667
              )Additional
                  paid-in capital
              
              
              1,655,292Accumulated
                  deficit
              
              
              (5,596,470
              )Total
                  stockholders' deficit
              
              
              (3,994,572
              )Total
                  liabilities and stockholders' deficit
              
              $
              38,505
  F-2
 Vocalscape
          Networks, Inc. and Subsidiary
 Consolidated
          Statements of Operations
 For
          the
          Three Months and Nine Months Ended September 30, 2006 and
          2005
 (Unaudited)
 Three
                    Months Ended
                September
                  30
              
              Nine
                    Months Ended
                September
                  30**2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue
              
              $
              36,229
              
              $
              41,008
              
              $
              180,547
              
              $
              100,241Cost
                  of revenue
              
              
              739
              
              
              -
              
              
              17,478
              
              
              -Gross
                  profit
              
              
              35,490
              
              
              41,008
              
              
              163,069
              
              
              100,241Costs
                  and expenses:Compensation
              
              
              85,087
              
              
              -
              
              
              204,056
              
              
              -Consulting
              
              
              411,238
              
              
              151,147
              
              
              695,532
              
              
              185,510Professional
                  fees
              
              
              39,892
              
              
              18,872
              
              
              247,021
              
              
              45,790General
                  and administration
              
              
              121,187
              
              
              68,244
              
              
              281,972
              
              
              302,928657,404
              
              
              238,263
              
              
              1,428,581
              
              
              534,228Loss
                  from operations
              
              
              (621,914
              )
              
              (197,255
              )
              
              (1,265,512
              )
              
              (433,987
              )Other
                  income (expense)Bad
                  debt recovery
              
              
              -
              
              
              -
              
              
              20,873
              
              
              -Writeoff
              
              
              -
              
              
              (63,853
              )
              
              (22,602
              )
              
              (60,154
              )Settlement
                  expense
              
              
              -
              
              
              -
              
              
              (1,414,000
              )
              
              -Loss
                  on conversion
              
              
              -
              
              
              -
              
              
              (220,000
              )
              
              -Interest
                  expense
              
              
              (36,621
              )
              
              (14,909
              )
              
              (262,381
              )
              
              (38,377
              )Other
                  Income
              
              
              -
              
              
              -
              
              
              6
              
              
              -Foreign
                  currency transaction gain (loss), net
              
              
              (2,348
              )
              
              (328
              )
              
              (8,757
              )
              
              (328
              )Total
                  other income (expense)
              
              
              (38,969
              )
              
              (79,090
              )
              
              (1,906,861
              )
              
              (98,859
              )Net
                  loss
              
              $
              (660,883
              )
              $
              (276,345
              )
              $
              (3,172,373
              )
              $
              (532,846
              )Net
                  loss per share - basic and diluted
              
              $
              (0.04
              )
              $
              (0.24
              )
              $
              (0.35
              )
              $
              (0.47
              )Weighted
                  average shares outstandingduring
                  the period
              
              
              15,972,280
              
              
              1,138,889
              
              
              9,032,289
              
              
              1,138,889
  F-3
 Vocalscape
          Networks, Inc. and Subsidiary
 Consolidated
          Statements of Cash Flows
 For
          the
          Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 **2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (3,172,374
              )
              $
              (532,846
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              7,278
              
              
              2,722Amortization
                  of debt discount
              
              
              160,000Loss
                  on debt conversion
              
              
              353,333
              
              
              -Loss
                on debt settlement
              
              
              1,414,000
              
              
              -Stock
                based compensation
              
              
              236,780
              
              
              -Changes
                  in other assets and liabilities:Other
                  assets
              
              
              (4,950
              )
              
              (3,641
              )Deferred
                  revenue
              
              
              (45,000
              )Accounts
                  payable
              
              
              (4,561
              )
              
              52,898Accounts
                  payable, related party
              
              
              88,915
              
              
              -Accrued
                  expenses
              
              
              75,880
              
              
              20,287Net
                  cash used in operations
              
              
              (890,699
              )
              
              (460,580
              )**Cash
                  flows from investing activities:**Acquisition
                  of property and equipment
              
              
              -
              
              
              (29,388
              )Acquisition
                  of software for development
              
              
              -
              
              
              -Net
                  cash used in investing activities
              
              
              -
              
              
              (29,388
              )**Cash
                  flows from financing activities:**Bank
                  overdraft
              
              
              185
              
              
              -Common
                  stock sales
              
              
              533,145
              
              
              -Repayment
                  of notes payable
              
              
              (53,243
              )
              
              (18,464
              )Loan
                  proceeds
              
              
              410,612
              
              
              489,582Net
                  cash provided by financing activities
              
              
              890,699
              
              
              556,035Net
                  increase (decrease) in cash and cash equivalents
              
              
              -
              
              
              66,067Cash
                  and cash equivalents, beginning of period
              
              
              -
              
              
              55,274**Cash
                  and cash equivalents, end of period**
              
              $
              -
              
              $
              121,341**Supplemental
                  disclosure of cash flow information:**Cash
                  paid during the period for:Interest
              
              $
              -
              
              $
              -Income
                  taxes
              
              $
              -
              
              $
              -**Supplemental
                  disclosure of non-cash investing and financing
                  activities:**Conversion
                of debt
                to common stock
              
              $
              235,000
              
              
              -Conversion
                of debt
                to preferred stock
              
              $
              5,000
              
              
              -Assignment
                of debt
                from creditors to related party shareholder
              
              $
              900,027
              
              
              -Settlement
                of
                accrued liabilities with common stock
              
              $
              86,000
              
              
              -Contributed
                loans to
                capital
              
              $
              13,650
              
              
              -Reclassificatoin
                of
                prepaid subscription liability to equity
              
              $
              45,000
              
              
              -
  F-4
 **Vocalscape
          Networks, Inc. and Subsidiary**
 **Notes
          to Consolidated Financial Statements**
 **September
          30, 2006**
 **(Unaudited)**
  **1.** **NATURE
        OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN**
  **Basis
        of Presentation -** The
        consolidated financial statements included in this report have been prepared
        by
        the Company pursuant to the rules and regulations of the Securities and Exchange
        Commission for interim reporting and include all adjustments (consisting
        only of
        normal recurring adjustments) that are, in the opinion of management, necessary
        for a fair presentation.
 
 Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with accounting principles generally accepted in the
        United States of America have been condensed or omitted pursuant to such
        rules
        and regulations for interim reporting. The Company believes that the disclosures
        contained herein are adequate to make the information presented not misleading.
        However, these financial statements should be read in conjunction with the
        consolidated financial statements and notes thereto included in the Company’s
        Annual Report for the period ended December 31, 2005, which is included in
        the
        Company’s Form 10-KSB.
 
 **Principles
        of Consolidation -** The
        consolidated financial statements include the accounts of Vocalscape Networks,
        Inc. (the “Company” or “VNI” or “Vocalscape”) and its wholly owned subsidiary
        Vocalscape Networks Operating Subsidiary, Inc. (“VNOS”). All material
        intercompany balances and transactions have been eliminated in consolidation.
 
 **Recapitalization** - On
        October 28, 2005, Vocalscape, Inc. (“VSI”) and Dtomi, Inc. (“Dtomi”) announced
        that on October 4, 2005, Dtomi and its wholly owned subsidiary Vocalscape
        Networks, Inc. (Subsidiary) (“VNI OLD”) effected a merger pursuant to that
        certain Agreement and Plan of Reorganization (the “Agreement”) by and between
        Dtomi and VSI dated August 25, 2005. Effective October 4, 2005, the date
        that
        Articles of Merger effecting the merger were filed with the Nevada Secretary
        of
        State, VNI OLD became a wholly owned subsidiary of Dtomi. Pursuant to the
        amended Agreement, Dtomi issued shares of its common stock with voting rights
        equal to 82% (1,138,889 common shares) of the voting power of the stockholders
        of Dtomi, to VSI in exchange for VNI OLD merging into a wholly owned subsidiary
        of Dtomi. The transaction closed on October 4, 2005 and the 1,138,889 common
        shares are included in common stock issuable at par as of September 30, 2006.
        The business of VNI OLD became the primary business of Dtomi. Subsequent
        to the
        recapitalization, Dtomi changed its name to Vocalscape Networks, Inc. and
        the
        subsidiary changed its name to Vocalscape Networks Operating Subsidiary,
        Inc.
 
 Due
        to
        the change in control of Dtomi, the transaction was accounted for as a
        recapitalization of VNI OLD.
 
 Accordingly,
        the financial statements of the Company consists of the historical operations
        of
        VNI OLD from its inception, and the operations of Dtomi from the
        recapitalization date. The Company assumed approximately $2.3 million of
        liabilities and deferred stock based costs of approximately $842,000 and
        is
        deemed to have issued 250,129 common shares to the existing pre-recapitalization
        shareholders of Dtomi. All share and per share data in the accompanying
        financial statements has been retroactively adjusted for the effect of the
        recapitalization.
  F-5
 
 **Vocalscape
            Networks, Inc. and Subsidiary**
 **Notes
            to Consolidated Financial Statements**
 **September
            30, 2006**
 **(Unaudited)**
 **Nature
        of Business and Current Operations -** VNOS is
        a developer of Voice over Internet Protocol (VoIP) telephony solutions. VNOS
        provides VoIP telephony solutions and communications software for Internet
        Service Providers (ISPs), Internet Telephony Service Providers (ITSPs) and
        Telecommunications companies worldwide. VNOS develops VoIP and interactive
        communications software, including Soft phone applications, Customer Acquisition
        and Billing Systems, SIP Servers, Gatekeepers and Virtual Calling Cards.
        VNOS’s
        strategy is to focus on VoIP software and Long Distance termination solutions
        that bring together a full range of communications solutions and services
        thereby providing a turn-key VoIP infrastructure for ISP’s, ITSP’s and
        Telecommunications companies.
 
 **Organization
        -** VNI
        is a
        Nevada corporation, which was incorporated on June 12, 1998. VNOS is a Nevada
        corporation, which was incorporated and began operations on February 5,
        2003.
 
 **Going
        Concern -** The accompanying financial statements have been prepared in
        conformity with accounting principles generally accepted in the United States
        of
        America, which contemplate continuation of the Company as a going concern.
        The
        Company had a net loss for the nine months ended September 30, 2006 of
        $3,172,373, net cash used in operations in the nine months ended September
        30,
        2006 of $890,699, and working capital deficit of $4,008,700, accumulated
        deficit
        of $5,596,470 and stockholders’ deficit of $3,994,572 at September 30, 2006.
 
 These
        conditions raise substantial doubt about the Company’s ability to continue as a
        going concern. These consolidated financial statements do not include any
        adjustments to reflect the possible future effect on the recoverability and
        classification of assets or the amounts and classifications of liabilities
        that
        may result from the outcome of these uncertainties.
  In
        order
        to execute its business plan, the Company will need to raise additional working
        capital and generate revenues. There can be no assurance that the Company
        will
        be able to obtain the necessary working capital or generate revenues to execute
        its business plan. The Company generated revenues from customer license
        agreements in 2006, entered into additional promissory notes in 2006 and
        has
        been raising additional capital under a Regulation S offering.  Management
        believes the revenues combined with the capital raised and its plan to raise
        additional capital will provide the Company with the ability to continue
        as a
        going concern.
 
 **2.** **PROPERTY
          AND EQUIPMENT**
 
 Property
        and equipment at September 30, 2006, consists of the following:
 
 Office
                  equipment
              
              $
              35,854Accumulated
                  depreciation
              
              
              (9,348
              )Property
                  and equipment, net
              
              $
              26,506
  F-6
 **Vocalscape
          Networks, Inc. and Subsidiary**
 **Notes
          to Consolidated Financial Statements**
 **September
          30, 2006**
 **(Unaudited)**
 Depreciation
        expense for the nine months ending September 30, 2006 and 2005, were $5,059
        and
        $2,722, respectively.
 
 **3.** **DEVELOPMENT
          COSTS**
 
 Capitalized
        software development cost consists of the following at September 30,
        2006:
 
 Cost
              
              $
              8,869Accumulated
                  amortization
              
              
              (5,174
              )Software,
                  net
              
              $
              3,695
  During
        the nine months ended September 30, 2006 the Company recognized $2,217 of
        amortization expense, upon general release of the software product.
 
 **4.** **LOANS
            AND NOTES PAYABLE, LOANS AND NOTES PAYABLE RELATED PARTIES, AND CONVERTIBLE
            DEBENTURES**
 
 Loans
        and
        notes payable to related and unrelated parties consists of the following
        at
        September 30, 2006:
 
 Note
                  payable to the related party principal shareholder/director of
                  the Company
                  and to companies owned or controlled by him; due on demand; unsecured;
                  with interest at prime plus 2% to 3% (10.25% to 11.25% at September
                  30,
                  2006)
              
              
              98,747Loan
                  payable to related party law firm, due on demand, non-interest
                  bearing
              
              
              59,000Subtotal
                  - Notes payable related parties
              
              
              157,747Note
                  payable, due on demand; unsecured; with interest at prime plus
                  3% (11.25%
                  at September 30, 2006)
              
              
              718,000Loans
                  payable to two individuals with interest accruing at 10%
              
              
              159,000Notes
                  payable to five individuals; due on demand; unsecured; with interest
                  at
                  prime plus 3% (11.25% at September 30, 2006)
              
              
              150,000Subtotal
                  - Notes payable unrelated parties
              
              
              1,027,000Total
                  Notes Payable
              
              $
              1,184,747
 
 F-7
 **Vocalscape
          Networks, Inc. and Subsidiary**
 **Notes
          to Consolidated Financial Statements**
 **September
          30, 2006**
 **(Unaudited)**
  The
        weighted average interest rate on short term outstanding as of September
        30,
        2006 was 10.18%.
 
 **Convertible
        Debentures** - In October 2005, upon recapitalization, the Company
        assumed four 10% one-year convertible debentures to four individuals for
        $11,698, $60,705, $6,121 and $6,388 cash. These debentures had been issued
        in
        October and November 2004. The debentures are convertible into 2,123 common
        shares based on a conversion rate of $40 per share. The embedded conversion
        options were determined not to be derivatives at the issuance date or as
        of
        September 30, 2006 since the debt qualifies as conventional convertible debt.
        Based upon the conversion rate at the issuance date, there was no beneficial
        conversion feature recorded.
 
 **Convertible
        Promissory Notes and Conversion** - In March 2006, the Company issued a
        convertible promissory note for $150,000 with interest payable at maturity
        at
        10.5% per annum. The note matures and is due March 3, 2008. The note principal
        is convertible to common stock at a fixed price of $.118 per share which
        equates
        to 1,271,186 common shares. Management has determined that this note qualifies
        as conventional convertible debt pursuant to SFAS 133 and EITF 00-19 and
        accordingly the embedded conversion option is not a derivative. The convertible
        promissory note was converted into common stock in March 2006. The Company
        computed a beneficial conversion value of $150,000 based on the quoted stock
        price on the grant date of $.60 per share. The $150,000 was recorded as a
        debt
        discount and credited to additional paid-in capital. The debt discount was
        amortized to interest expense in March 2006 when the note was converted.
        The
        note is guaranteed by, Azatel Communications Inc. (the “Acquiree ”) (see note
        11) with the note holder holding a first security interest in substantially
        all
        assets of the Acquiree and the Company has guaranteed the
        conversion.
 
 In
        March
        2006, the Company issued a convertible promissory note for $10,000 with interest
        payable at maturity at 10.5% per annum. The note matures and is due March
        15,
        2008. The note principal is convertible to common stock at a fixed price
        of
        $.118 per share which equates to 85,746 common shares. Management has determined
        that this note qualifies as conventional convertible debt pursuant to SFAS
        133
        and EITF 00-19 and accordingly the embedded conversion option is not a
        derivative. The convertible promissory note was converted into common stock
        in
        March 2006. The Company computed a beneficial conversion value of $10,000
        based
        on the quoted stock price on the grant date of $.60 per share. The $10,000
        was
        recorded as a debt discount and credited to additional paid-in capital. The
        debt
        discount was amortized to interest expense in March 2006 when the note was
        converted.
 
 **5.** **LOAN
        PAYABLE FOR SOFTWARE PURCHASE**
 
 In
        2004 a
        liability was recorded relating to a software purchase. The software purchase
        price was $200,000 Canadian dollars (“CA$”) payable with CA$26,096 down payment
        and CA$10,842 payable per quarter commencing May 1, 2004 and on August 1,
        November 1, February 1 and May 1 in each year thereafter until the purchase
        price is paid in full. In accordance with APB 21, “Interest on Receivables and
        Payables,” the Company imputed interest at 6% or CA$21,845 on this loan payable.
        This resulted in an initial loan payable balance translated to US dollars
        of
        $136,538, net of discount of $16,742, an initial payment made of $20,000
        (recorded as a note payable to the related party assignor of the purchase
        agreement) and quarterly payments of approximately $8,309 as adjusted for
        foreign currency transaction gains or losses.
  F-8
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 The
        loan
        payable balance at September 30, 2006 was as follows:
 
 Loan
                  payable
              
              $
              103,352Debt
                  discount
              
              
              (11,694
              )Loan
                  payable, net of discount
              
              $
              91,658Less:
                  current portion
              
              
              (69,781
              )Loan
                  payable, long term
              
              $
              21,877
 
 Amortization
        of debt discount recorded as interest expense was $0 and $5,048 in 2005 and
        2004, respectively. This loan payable is collateralized by the software asset.
        Additional interest in the amount of $8,716 was accrued in the nine months
        ended
        September 30, 2006. The loan is currently in default.
 
 **6.**  **STOCKHOLDERS’
        DEFICIT**
 
 **Recapitalization
        -** In
        October 2005, VNI OLD was acquired by Dtomi, Inc., a public shell, in a
        transaction accounted for as a recapitalization of the Company. All authorized,
        issued and outstanding share and per share data in the accompanying consolidated
        financial statements has been retroactively adjusted to reflect the
        recapitalization. (See Note 1)
 
 **Preferred
        Stock -** The
        Company has authorized 25,000,000 shares of preferred stock. The Board of
        Directors at its discretion may determine the rights and preferences of the
        preferred stock. In December 2005, the Company designated 100,000 shares
        as
        Series A Convertible Preferred Stock (“Series A shares”). The Series A shares
        upon issuance and consideration received by the Company is convertible to
        common
        stock on a one-for-one basis at a minimum of 50 shares per conversion. The
        conversion rate is not adjustable except for standard anti-dilution provisions,
        such as stock splits, reorganization or recapitalizations. Upon liquidation
        the
        Series A stockholders would receive $0.50 per share plus any unpaid dividends.
        Each Series A share has voting rights equal to 5,000 common shares. On January
        20, 2006, the Company accepted a subscription from its CEO to purchase 20,000
        Series A shares in exchange for a $5,000 portion of a promissory note due
        to the
        CEO. Such note was previously due to a controlled affiliate of the CEO and
        assigned to the CEO by that affiliate. The issuance of these shares increases
        the CEO’s voting control of the Company to approximately 88%.
 
 **Common
        Stock -** During
        the first quarter of 2006 the Company received $91,961, net of offering costs
        of
        approximately $133,000 from the sale of common stock through a Regulation
        S
        Stock Purchase Agreement. The Company issued 1,749,826 common shares and
        has
        issuable 215,500 common shares.
  F-9
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 During
        March 2006, the Company issued 1,271,186 common shares upon conversion of
        a
        convertible note (see Note 4).
 
 During
        March 2006, the Company issued 85,746 common shares upon conversion of a
        convertible note (see Note 4).
 
 During
        the second quarter of 2006 the Company received $ 73,436 from the sale of
        common
        stock through a Regulation S Stock Purchase Agreement. The Company issued
        1,991,625 common shares and had issuable 634,000 common shares. During the
        second quarter the Company reclassified $16,159 from liabilities to additional
        paid in capital to reflect a correction on the amount of proceeds due to
        the
        Company on the Reg S shares sold in the first quarter. This is reflected
        above
        in the $91,961 proceeds in the first quarter. The 634,000 shares were issued
        in
        the third quarter.
 
 During
        the second quarter loans payable of $75,000 were converted to 500,000 common
        shares at a valuation of $ 295,000 or $0.59 per share based on the quoted
        trade
        price on the conversion date. A loss on conversion of $220,000 was recognized.
 
 During
        the second quarter 800,000 shares were issued under a consulting agreement
        valued at $240,000 based on the $0.30 quoted trade price on the grant date.
        The
        $240,000 is being recognized over the 6-month term with $60,000 expensed
        as of
        June 30, 2006. During the third quarter $120,000 was expensed.
 
 During
        the second quarter 5,000,000 shares were issued to settle $86,000 of recorded
        and $300,000 of disputed liabilities. The settlement was valued at $1,500,000
        based on the quoted trade price of $0.30 per share on the settlement date
        resulting in a loss of $1,414,000.
 
 During
        the third quarter 200,000 shares were issued pursuant to a consulting agreement
        that runs from July 15, 2006 through January 15, 2007. These shares were
        valued
        at $0.40 per share based on the quoted trading price on the agreement date
        and
        $33,333 was recorded as expense in the quarter and $46,667 was recorded as
        Deferred Consulting Fees.
 
 During
        the third quarter 522,600 shares were issued for under the related party
        legal
        services agreement (see Note 7). These shares were valued at $0.30 per share.
        The total amount of $156,780 was recorded as an expense.
 
 During
        the third quarter the Company received $85,247 (net of a direct loan payment
        to
        one of the Company’s related party lenders of $27,500-see Note 7) from the sale
        of stock through a Regulation S Stock Purchase Agreement. The Company issued
        1,743,742 common shares.
 
 During
        the third quarter the Company received $210,000, which represented the balance
        due on a subscription agreement for 2,000,000 shares at $0.15 per share.
        The
        amount received was net of $45,000 in offering fees. A $45,000 down payment
        in
        May 2006 was paid directly to a service provider of the Company and had been
        recorded as other liabilities due to the investor as of June 30, 2006. As
        of
        September 30, 2006 this $45,000 other liabilities was reclassified to equity
        resulting in an equity amount of $255,000, net of the other $45,000 in offering
        fees. The 2,000,000 shares are shown in the accompanying consolidated financial
        statements as issuable.
  F-10
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 **Shares
        Issuance Authorized** - During February 2006, the Company authorized
        1,550,000 common shares to be issued for services. The shares will be valued
        at
        the quoted market prices on the respective measurements dates and the resulting
        expense will be recognized over the service periods. The shares have not
        been
        issued or accounted as of the date of this report.
 
 **7.** **RELATED
        PARTY TRANSACTIONS**
 
 Notes
        payable to our former CEO and current director or his affiliates were $98,747
        at
        September 30, 2006.
 
 During
        January 2006, the Company received a loan of $27,500 from the wife of a
        director, which bears interest at 10% and is due March 31, 2006. The proceeds
        from the loans were $25,000 with $2,500 of the related party loan being a
        loan
        fee. The $27,500 loan was repaid when the proceeds were received by the Company
        in September, 2006 from the sale of the Regulation S stock. The $27,500 was
        deducted before the funds were sent to the Company. (see Note 6)
 
 For
        purposes of these consolidated financial statements, during 2005, the Company
        has recorded allocated expenses, which were paid by the former parent using
        the
        specific identification method. Management believes the allocation is
        reasonable.
 
 Certain
        officers and directors of the Company remain as officers and directors of
        the
        former parent, Vocalscape, Inc.
 
 The
        Company has an agreement with a related party director dated August 25, 2005
        for
        legal services with his law firm whereby the related party is periodically
        issued vested non-forfeitable common shares of the Company so the director
        shall
        hold 4.9% of the issued and outstanding common shares and any proceeds from
        the
        sale of such shares by the related party are credited against invoice amounts
        due to that related party for legal services. The agreement has no stated
        term.
        Due to the contingent nature of the proceeds and the unstated term of the
        legal
        service agreement, the fair value of any shares issued will be expensed when
        issued. The related party invoices are accrued to accounts payable, periodically
        paid in cash and the accounts payable and legal expenses are credited for
        any
        proceeds in the period the proceeds are received by the related party and
        reported to the Company. As of September 30, 2006 no proceeds were reported
        to
        the Company and 522,600 additional shares were granted under the agreement.(see
        Note 6). At September 30, 2006, accounts payable to this law firm were $402,680
        which is included in accounts payable, related party. In addition, the Company
        has a loan payable to the law firm in the amount of $59,000 which is included
        in
        loans and notes payable, related parties. Expenses incurred by the Company
        during 2006 to this law firm were $103,204.
 
 Loans
        payable to related parties were $157,747 at September 30, 2006.
  F-11
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 Other
        payables to a former director related party were $900,027 at September 30,
        2006.
 
 **8.** **COMMITMENTS
        AND CONTINGENCIES**
 
 Legal
        Matters
 
 From
        time
        to time we may become subject to proceedings, lawsuits and other claims in
        the
        ordinary course of business. Such matters are subject to many uncertainties,
        and
        outcomes are not predictable with assurance.
  The
        Company is subject to a claim from a consultant vendor for approximately
        $12,200. The Company has filed a counterclaim to recover approximately $21,000
        previously paid to this consultant for non-performance of services. The Company
        previously accrued the $12,200 in 2005, which remains accrued at September
        30,
        2006. Management believes it will prevail in this matter.
  In
        July
        and August 2005, the Company received correspondence from a former officer
        and
        former employee regarding threatened material litigation relating to alleged
        compensation due to each employee. These amounts relate to periods of Dtomi,
        Inc. prior to the recapitalization transactions of October 2005. Although
        the
        Company disputes such amounts, these amounts aggregating $687,407 had been
        previously accrued by Dtomi, Inc. in a period prior to 2005 and are reflected
        in
        accrued expenses at September 30, 2006.
 
 The
        Company has received claims from a prior director of Dtomi, Inc. relating
        to
        periods prior to the October recapitalization transaction with the Company.
        The
        cash amounts the director claims he is due total approximately $520,000 and
        the
        total shares he claims he is due are estimated by the Company to be
        approximately 6,300. These amounts appear to relate to prior license or other
        alleged agreements between the director and the Company. The Company has
        accrued
        $86,000 in prior license fees due and has accounted for, in a prior period
        of
        Dtomi, Inc. approximately 15,278 common shares issued by the transfer agent
        in
        the director’s name. The director claims he never received 2,778 of the 15,278
        shares or other anti-dilution shares. Management of the Company disputes
        the
        remaining cash amounts and believes no anti-dilution shares are due (which
        would
        account for the remaining 3,522 shares) since the license agreement was
        terminated in early 2005 by the licensor. Management believes it will prevail
        in
        this matter. Accordingly, no accruals have been made for the disputed amounts.
        The termination of the Patent License Agreement terminated these and other
        obligations during 2005. See note 13 for a discussion of the settlement
        agreement.
 
 Other
        Commitments
 
 The
        Company is a party to a five-year office lease agreement covering 2,238 square
        feet, which commenced July 1, 2005, for the office in Vancouver, British
        Columbia. The lease provides for 22 monthly payments of CA$2,238 Canadian
        dollars (approximately $1,850 U.S. dollars) with two free months during the
        first 24 months of the agreement; 24 monthly payments of CA$2,331 (approximately
        $1,930 U.S. dollars) during the third and fourth years of the agreement;
        and 12
        monthly payments of CA$2,425 (approximately $2,000 U.S. dollars) during the
        final year of the agreement. In addition, the agreement provides for a monthly
        common area maintenance charge of CA$1,585 (approximately $1,315 U.S.
        dollars).
  F-12
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 The
        Company is a party to a second office lease agreement, with a two-year term,
        covering 1,435 square feet, which commenced March 1, 2005, for the office
        in
        White Plains, New York. The agreement calls for monthly rental of
        $2,350.
 
 The
        Company enters into sales agent and distributor agreements to sell its products.
        These agreements are primarily commission based. There were no commissions
        payable as of September 30, 2006.
 
 In
        November 2005 the Company executed a Merchant Banking and Consultant Agreement
        whereby the consultant will provide various services to the Company. The
        consultant is to be compensated in 5% cash and 5% capital stock of the value
        of
        any transaction introduced by the consultant to the Company. Such fee would
        be
        payable at the closing of such transaction.
 
 In
        May,
        2006 the Company entered into a consulting agreement with a former officer
        of
        Dtomi wherein he is to be issued 50,000 common shares of stock for providing
        consulting services to the Company for two months starting on May 15, 2006.
        The
        Board of Directors has not approved this contract and has not recognized
        the
        expense or issuance of the shares as of September 30, 2006, pending Board
        approval of the contract.
 
 **9.** **CONCENTRATIONS**
 
 **Revenues
        -**During the nine months ending September 30, 2005, the company had
        revenue of $100,241. During the nine months ending September 30, 2006 the
        company had revenues of $180,547. In the nine months ending September 30,
        2006
        100% of revenues were from five customers as follows; Customer 1: 41%, customer
        2: 23%, customer 3: 20%, customer 4: 14% and customer 5: 2%.
 
 **10.** **ACCRUED
        EXPENSES**
 
 Accrued
        expenses at September 30, 2006 consist of the following:
 Accrued
                    compensation
                
                $
                687,407Accrued
                    license fees
                
                
                36,000Accrued
                    interest
                
                
                264,654Accrued
                    expenses - other
                
                
                79,401Total
                
                $
                1,067,462
 
 F-13
 **Vocalscape
          Networks, Inc. and Subsidiary**
 **Notes
          to Consolidated Financial Statements**
 **September
          30, 2006**
 **(Unaudited)**
 
 **11.** **SHARE
        EXCHANGE AGREEMENT**
 
 On
        February 26, 2006, Vocalscape and Azatel Communications Inc., a British Columbia
        corporation (“Azatel”), and all of the shareholders of Azatel (the
“Shareholders”), entered into a Share Exchange Agreement (the “Share Exchange
        Agreement”), pursuant to which Vocalscape shall acquire all of the issued and
        outstanding shares of common shares of Azatel in a transaction valued at
        approximately $118,000.  Under the Share Exchange Agreement, Vocalscape
        shall issue 200,000 shares of its common stock to the Shareholders, who number
        three persons, in exchange for all of their respective shares of Azatel (the
        “Share Exchange”).   Azatel has taken the position that the Share
        Exchange Agreement is terminated.  Vocalscape does not believe that the
        Share Exchange Agreement is terminated. The Agreement is currently on hold
        and
        management is uncertain whether it will be consummated or not. Therefore,
        the
        company has fully reserved $22,601, which is the amount advanced through
        March
        31, 2006. On June 19, 2006 the company received CAN$23,804 pursuant to a
        settlement agreement signed on May 23, 2006 wherein the Share Exchange Agreement
        was terminated. The company has recorded the amount received of $20,873 as
        a bad
        debt recovery in June 2006.
 
 **12.** **PAYABLE
        TO SHAREHOLDER**
 
 During
        the second quarter one of the shareholders of the Company, who is a former
        director who resigned during the second quarter, was assigned certain debts
        of
        the company pursuant to assignments with the Company as follows:
 Payable
                    to Vocalscape, Inc.
                
                $
                265,617Former
                    officer note payable and accrued compensation
                
                
                214,410Accounts
                    payable to related party attorney
                
                
                420,000Total
                
                $
                900,027
  There
        was
        no consideration given by the Company to assign these debts. They were assigned
        from the vendors directly to the shareholder in a private transaction between
        those parties.
 
 **13.** **SUBSEQUENT
        EVENTS**
 
 **Authorized
        Capital -**On October 6, 2006 the Board of Directors approved increasing
        the authorized common stock of the Company from 100,000,000 shares to
        500,000,000 shares. The amendment has not been filed with the Nevada Secretary
        of State yet.
 
 **Stock
        Options -**On October 6, 2006 the Board of Directors approved lowering
        of the option price for grants to be made under the Company’s 2006 Stock Option
        Plan from 80% of fair market value to 50% of fair market value. The Board
        also
        approved the issuance of 3,700,000 immediately vested common stock options
        to
        three employees of the Company. The option exercise price of the stock was
        $0.055 per share and the market value was $0.11 per share. The fair value
        of the
        stock options computed using a Black-Scholes option pricing method will be
        recognized as an expense in the fourth quarter of 2006.
  F-14
 Vocalscape
          Networks, Inc. and Subsidiary
 Notes
          to Consolidated Financial Statements
 September
          30, 2006
 (Unaudited)
 **Common
        Stock -**On October 6, 2006 (the grant date) the Board of Directors
        approved the issuance of 35,150,000 shares of common stock to be issued to
        the
        employees for compensation and bonuses for prior service with the Company.
        These
        shares were valued at $0.11 per share based on the quoted trading price of
        the
        common stock on the grant date. The total value of the issuance of $3,866,500
        was recorded on the grant date as an expense .
 
 On
        October 26, 2006 the Board of Directors approved the issuance of 100,000,000
        Class B Common Shares. The shares will carry no voting rights and have a
        par
        value of $0.001 per share. The Class B Common Stock would only be sold to
        foreign investors.
 
 **Employment
        Agreement -**On September 22, 2006 the Company accepted an employment
        agreement with Robert Koch to be employed as Head of Business Development.
        The
        initial term is for five years with automatic renewals. The agreement provides
        for a base salary, stock options, discretionary bonuses, non-dilution
        provisions, stock grants, and severance benefits.
  F-15




**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**




You
      should read the following discussion and analysis of our financial condition
      and
      results of operations together with our financial statements and related notes
      appearing elsewhere in this Form 10-QSB. This discussion and analysis contains
      forward-looking statements that involve risks, uncertainties and assumptions.
      Our actual results may differ materially from those anticipated in these
      forward-looking statements.




**OVERVIEW**





The
      following discussion relates to the business of Vocalscape Networks, Inc.,
      which
      includes the operations of its wholly owned subsidiary Vocalscape Operating
      Subsidiary, Inc., which holds assets through which Vocalscape provides services
      in connection with its business. Vocalscape is a next generation communications
      provider that provides Voice over Internet Protocol (“VoIP”) solutions. The
      current business of Vocalscape is the result of a merger of Dtomi, Inc. with
      Vocalscape Networks, Inc. on October 4, 2005, a date prior to which Vocalscape
      Networks, Inc. was not affiliated with the Company, and the Company was named
      “Dtomi, Inc.” Until October 4, 2005, the Company was named “Dtomi, Inc.”, and
      was a Florida-based, company that was developing the Air Spring Axle system,
      a
      suspension system for small and medium sized trailers. This third fiscal quarter
      of 2006 is the third full quarterly report since the merger was
      consummated.





4


**PRODUCTS
      AND SERVICES**




Vocalscape
      provides VoIP telephony solutions and communications software for Internet
      Service Providers (“ISPs”), Internet Telephony Service Providers (“ITSPs”) and
      telecommunications companies worldwide. Vocalscape develops VoIP and interactive
      communications software including Softphone applications, Customer Acquisition
      and Billing Systems, SIP Servers, Gatekeepers and Virtual Calling Cards.
      Vocalscape’s strategy is to focus on VoIP software and long distance termination
      solutions that bring together a full range of communications solutions and
      services thereby providing a turn-key VoIP infrastructure for ISPs, ITSPs and
      Telecommunications companies. Additionally, Vocalscape is actively seeking
      and
      negotiating strategic alliances with companies.





**COMPETITION**





The
      market for VoIP telephony software and services is relatively new and is quickly
      evolving and subject to rapid technological change. The VoIP telephony market
      has also seen significant consolidation and this trend is projected to continue.
      The companies following companies are not meant to be an exhaustive list of
      competitors to Vocalscape, but represent the largest and most active
      participants in this market: Deltathree, VocalTec Communications Ltd. and
      Net2Phone.





Vocalscape’s
      software solutions operate on the customer’s choice of hardware. Our software
      solutions support our customer’s choice of business models including, pre-paid,
      post-paid or monthly subscriber billing systems. Vocalscape’s product offerings
      are designed to streamline subscriber provisioning and subscriber services
      online.





**DEVELOPMENT**





Vocalscape
      has a team of engineers with software and systems industry experience. These
      engineers and management have significant experience in telecommunications,
      communication and control systems development. Vocalscape will be able to bring
      to market its products in a timely fashion while retaining the IP, and producing
      a superior product with high reliability and quality. Our core team is
      overseeing the development of: 1) a seamless 911 Dashboard designed to integrate
      multiple 911 service providers and 2) an IP PBX subscriber system, enabling
      resellers to service business customers online with a self-managed telephone
      system.




**DISTRIBUTION
      & MARKETING**





Vocalscape
      has a direct sales team and will build an indirect or reseller sales force.
      Direct resources will target the ISP’s, ITSP’s and Alternative Providers with
      the residential VoIP solution. Indirect channels will include VARs that supply
      the growing VoIP provider market with IP PBX solutions.





The
      direct sales force will also utilize web based leads (generated by search
      engine, blog, publication and email marketing) and outbound telemarketing to
      go
      directly after the solution sales clients. A select number of tradeshows will
      be
      attended to build the Vocalscape brand and the awareness of the solutions and
      product offerings from the company.




**GOING
      CONCERN**




Our
      independent registered public accounting firm has added an explanatory paragraph
      in connection with the December 31, 2005 consolidated financial statements,
      which states that our company has nominal revenues and has incurred net losses
      of $1,890,435 and net cash used in operations of $683,398 in the year ended
      December 31, 2005. Our current liabilities exceed our current assets by
      $3,867,254 and we have an accumulated deficit and stockholder’s deficit of
      $2,424,097 and $3,859,107 at December 31, 2005. For the nine months ended
      September 30, 2006 we have a net loss and cash used in operations of $3,172,373
      and $890,699, respectively and have a working capital deficit, stockholders
      deficit and accumulated deficit of $4,008,700, $3,994,572 and 5,596,470,
      respectively at September 30, 2006.These conditions give rise to substantial
      doubt about Vocalscape’s ability to continue as a going concern. Vocalscape’s
      ability to continue developing its operations and generate revenues or its
      ability to obtain additional funding will determine its ability to continue
      as a
      going concern. Our consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




5


**RESULTS
      OF OPERATIONS**




The
      Company recorded revenues of $36,229 for the quarter ending September 30, 2006,
      as compared to $41,008 of revenues for the quarter ending September
      30, 2005.




General
      and administrative expenses increased to $121,187 for the quarter ending
      September 30, 2006, an increase of 82% over expenses of $68,244 for the quarter
      ending September 30, 2005. General and administrative expenses in this first
      quarter of 2006 consist primarily of rent, telephone, travel and other general
      corporate and office expenses.




Interest
      expense was $36,621 for the quarter ending September 30, 2006, an increase
      of
      142% over expense of $14,909 for the quarter ending September 30, 2005. This
      interest expense consists of interest on various loans, and convertible
      debentures.




Compensation
      expense for the quarter ending September 30, 2006, was $85,087, as compared
      to
      none for the quarter ending September 30, 2005. Compensation expense for the
      current quarter consists of salaries paid to the Company’s officers. In prior
      year, all persons were paid as consultants.




Professional
      fees increased to $39,892 for the quarter ending September 30, 2006, an increase
      of 111% of such costs for the quarter ending September 30, 2005 at $18,872.
      These consist of primarily of legal and accounting fees in 2006 as a result
      of
      the Company being a reporting issuer under the Securities Exchange Act of 1934,
      as amended.




Consulting
      fees expense for the quarter ending September 30, 2006 was $411,238, an increase
      of 172% over expenses of $151,147 for the quarter ending September 30, 2005.
      The
      consulting fees in this second quarter of 2006 primarily relate to amounts
      paid
      to non-officer and director persons performing services on behalf of
      Vocalscape.




The
      net
      loss for the quarter ending September 30, 2006 is $660,883 (net loss per share
      of $0.04) compared to a net loss for quarter ending September 30, 2005 of
      $276,345 (net loss per share of $0.24).




**LIQUIDITY
      AND CAPITAL RESOURCES**




The
      Company has cash and cash equivalents of $2,500, total current liabilities
      of
      $4,011,200 and total assets of $38,505 at September 30, 2006. The Company
      continues to incur costs, but has not secured adequate new revenue to cover
      the
      costs. The Company does not currently have an adequate source of reliable,
      long-term revenue to fund operations. As a result, Vocalscape is completely
      dependent on outside sources of capital funding to continue operations. There
      can be no assurances that the company will in the future achieve a consistent
      and reliable revenue stream adequate to support continued operations. In
      addition, there are no assurances that the Company will be able to secure
      adequate sources of new capital funding, whether it is in the form of share
      capital, debt, or other financing sources.




**PLAN
      OF OPERATION FOR THE NEXT 12 MONTHS**




Vocalscape
      has limited cash and will only be able to satisfy its cash requirements through
      raising additional funds in the next 12 months.





6


The
      company recognizes that, without additional financing, the success of
      Vocalscape’s VOIP business is highly uncertain and Vocalscape must adapt its
      business operations to this reality. We are therefore seeking to broaden and
      transform our business base through the acquisition of innovative,
      value-differentiated products and services. Our focus is on revenue generating
      businesses poised for rapid growth that can benefit from being part of a public
      company and benefit from the sharing of resources and the sharing of costs
      associated with public filings and compliance.





We
      have
      limited funds with which to pursue the acquisition of new business
      opportunities, as we have generated losses since our inception. In our pursuit
      of acquiring new business opportunities, we anticipate needing additional funds
      to cover legal and accounting expenses, due diligence expenses and other costs.
      Subject to the availability of adequate financing, Vocalscape will continue
      to
      focus on providing services to our existing customers, marketing and selling
      our
      products to new customers and the continuous development of our products and
      services




**EVENTS
      SUBSEQUENT TO THE QUARTER ENDED SEPTEMBER 30, 2006**





On
      October 6, 2006, the Board of Directors authorized the issuance of 35,150,000
      shares of common stock to be issued to the employees for compensation and
      bonuses for prior service with the Company. These shares were valued at $0.11
      per share based on the quoted trading price of the common stock on the grant
      date. The total value of the issuance of $3,866,500 was recorded on the grant
      date as an expense.





**ITEM
      3. CONTROLS AND PROCEDURES.**





As
      of the
      period covered by this report, Vocalscape carried out an evaluation, under
      the
      supervision and with the participation of its management, including Ron
      McIntyre, Vocalscape’s President, who also currently acts as Vocalscape’s
      principal financial officer, of the design and operation of its disclosure
      controls and procedures. Based on this evaluation, Vocalscape’s President
      concluded that Vocalscape’s disclosure controls and procedures are effective for
      the gathering, analyzing and disclosing of information that Vocalscape is
      required to disclose in the reports it files under the Securities Exchange
      Act
      of 1934, within the time periods specified in the SEC’s rules and forms. There
      have been no significant changes in the Vocalscape’s internal controls or in
      other factors that could significantly affect the internal controls subsequent
      to the date of this evaluation.




**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS.**





The
      Company is not currently subject to any legal proceedings. From time to time,
      the Company may become subjected to litigation or proceedings in connection
      with
      its business, as either a plaintiff or defendant. There are no such pending
      legal proceedings to which the Company is a party that, in the opinion of
      management, is likely to have a material adverse effect on the Company’s
      business, financial condition or results of operations.




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**





In
      connection with an Employment Agreement by and between Vocalscape and Robert
      W.
      Koch, Chairman of the Board of Directors of the Company, on October 26, 2006,
      the Company offered and sold to Mr. Koch 15,000 shares of Series A Convertible
      Preferred Stock of the Company. Mr. Koch holds 35,000 shares of Series A
      Convertible Preferred Stock as of November 17, 2006, of which the voting power
      is equal to 175,000,000 shares of Company common stock. Mr. Koch has control
      of
      approximately 80% of the voting power of the Company.





Vocalscapes’s
      Articles of Incorporation, as amended, authorizes the issuance of up to 100,000
      shares of Series A Convertible Preferred Stock. Each share of Series A
      Convertible Preferred Stock is (i) convertible, at the option of the holder,
      on
      a 1-for-1 basis, into shares of common stock (subject to stock dividends, stock
      splits and the like), (ii) automatically converts into common stock immediately
      prior to a merger, sale of assets, share exchange, or other reorganization,
      (iii) receives a liquidation preference of $0.50 per share, and (iv) has voting
      rights equal to 5,000 shares of common stock (subject to stock dividends, stock
      split and the like). The rights of holders of common stock could be materially
      limited upon the issuance of shares of Series A Convertible Preferred Stock
      because the designated 100,000 shares of Series A Convertible Preferred Stock
      have aggregate voting power equal to 500,000,000 shares of common stock of
      Vocalscape. Vocalscape is authorized in its Articles of Incorporation, as
      amended, to issue 100,000,000 shares of common stock. The effect of the creation
      of the Series A Convertible Preferred Stock is that the future holders of Series
      A Convertible Preferred Stock could have voting power greater than the aggregate
      voting power of the holders of shares of common stock of Vocalscape, thereby
      effecting a change in control of Vocalscape to the holders of shares of Series
      A
      Convertible Preferred Stock.





7


Mr.
      Koch
      currently owns or has voting power over approximately 17.44% of the issued
      and
      outstanding shares of common stock of the Company or voting rights to 10,002,804
      shares of the 57,123,435 shares of common stock issued and outstanding at
      November 17, 2006 and voting power of all issued shares of Series A Convertible
      Preferred Stock of the Company. Mr. Koch holds 35,000 shares of Series A
      Convertible Preferred Stock, which, in conjunction with his beneficial ownership
      interest in his shares of common stock, gives Mr. Koch control over
      approximately 80% of the voting power of the Company.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES.**





None.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





None.


**ITEM
      5. OTHER INFORMATION.**





On
      September 22, 2006 Vocalscape entered into an Employment Agreement (the
“Employment Agreement”) with Robert Koch, Vocalscape’s current Chairman of the
      Board of Directors and former Chief Executive Officer, to be employed as Head
      of
      Business Development. The agreement provides for, among other things, a base
      salary of $360,000 per year, a 5% pay increase per year, a provision which
      requires that Mr. Koch hold a majority of the voting control of the Company,
      a
      stock grant of 15,000 shares of Series A Convertible Preferred Stock (further
      described in Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
      of Part II of this Quarterly Report on From 10-QSB), discretionary bonuses,
      the
      option to convert unpaid salary into shares of common stock of the Company,
      the
      ability to participate in the Company’s 2006 Stock Option Plan, an
      indemnification agreement, and severance benefits.





**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K.**





(a)
      Form
      8-K Filings





On
      September 29, 2006, Vocalscape filed a Form 8-K disclosing the resignation
      of
      Robert W. Koch as a Chief Executive Offices of Vocalscape and the assumption
      of
      Ron McIntyre, President of Vocalscape, of the duties as the principal executive
      officer of Vocalscape.





(b)
      Exhibits




ExhibitNumber
              Description





3.1.1
              Articles
                  of Incorporation of the Company (incorporated by reference to the
                  Company’s Registration Statement on Form 10-SB 12G/A filed on November
                  26,
                  1999).





3.1.2
            Certificate
                of Amendment to Articles of Incorporation of the Company (incorporated
                by
                reference to the Company’s Registration Statement on Form 10-SB 12G/A
                filed on November 26, 1999).





3.1.3
            Certificate
                of Amendment to Articles of Incorporation of the Company filed October
                25,
                2001 (incorporated by reference to the Company’s Quarterly Report on Form
                10-QSB filed on December 18, 2001).




8




3.1.4
            Certificate
                of Amendment to Articles of Incorporation of the Company filed November
                6,
                2005 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on May 18, 2006).





3.2.1
              Bylaws
                  (incorporated by reference to the Company’s Registration Statement on Form
                  10-SB 12G/A filed on November 26,
                  1999).





10.1
            Employment
                Agreement dated September 22, 2006, by and between the Company and
                Robert
                Koch.





31.1
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002.





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




Dtomi,
              Inc.(Name of Registrant)Date: November
              20, 2006
            By:
            /s/ Ron
              McIntyreRon
              McIntyrePresident





**EXHIBIT
      INDEX**





**ExhibitNumber**
                **Description**


3.1.1
            Articles
                of Incorporation of the Registrant (incorporated by reference to
                the
                Company’s Registration Statement on Form 10-SB 12G/A filed on November 26,
                1999).





3.1.2
            Certificate
                of Amendment to Articles of Incorporation of Dtomi (incorporated
                by
                reference to the Company’s Registration Statement on Form 10-SB 12G/A
                filed on November 26, 1999).





3.1.3
            Certificate
                of Amendment to Articles of Incorporation of Dtomi filed October
                25, 2001
                (incorporated by reference to the Company’s Quarterly Report on Form
                10-QSB filed on December 18, 2001).





3.1.4
            Certificate
                of Amendment to Articles of Incorporation of the Company filed November
                6,
                2005 (incorporated by reference to the Company’s Annual Report on Form
                10-KSB filed on May 18, 2006).





3.2.1
            Bylaws
                (incorporated by reference to the Company’s Registration Statement on Form
                10-SB 12G/A filed on November 26,
                1999).





10.1
            Employment
                Agreement dated September 22, 2006, by and between the Company and
                Robert
                Koch.




9




31.1
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002.







10